Financial Daily from THE HINDU group of publications
Saturday, Mar 01, 2003
Industry & Economy
Price cuts drive auto into top gear
GO ahead, spoil yourself. Catch the wind in your hair. Buy the bigger car, the one of your dreams. And still be left with enough money in your pockets to fuel up for a year! Think its `Mission Impossible', think again.
With the eight per cent slash in excise duty on cars, the Finance Minister, Mr Jaswant Singh, just made that possible (at least for now) and redefined the car buyer's `budget'. The cut and the lower prices of cars would almost have us believe that the car is no more a luxury product.
So, how much will the duty cut translate into in terms of price cuts? The Maruti 800 could be priced lower by about Rs 12,000. B-segment cars such as the Maruti Zen, Hyundai Santro, Maruti Wagon-R, Tata Indica and the Fiat Palio could be cheaper by Rs 18,000 to Rs 20,000. Super luxury cars such as the Mercedes Benz E-class, Toyota Camry, Opel Vectra, Ford Mondeo and Hyundai Sonata may be priced lower by a range of Rs 60,000 to Rs 1.25 lakh depending on the model.
The automobile industry has enough reason to cheer this Budget, despite the fact that the cut in excise duty announced on passenger cars and multi-utility vehicles (MUVs) is only half what was wanted by the Society of Indian Automobile Manufacturers (SIAM). And from being one of the highest taxed among all automobile markets in the world, the Indian auto market is probably on the threshold of a more moderate tax regime as far as this industry goes.
Coming as it has during a year, when car sales have been yo-yoing and is now showing signs of a mild slowdown, the duty cuts will most definitely help companies in the industry post higher sales during the coming months. While the resultant reduction in prices of passenger cars will attract a new section of buyers in the entry level A-segment, the lower prices will also accelerate the process of potential car buyers upgrading themselves to a cusp-level or higher priced segment.
The Finance Minister has also announced a reduction in excise duties applicable on electric vehicles from 16 per cent to 8 per cent. This cut is aimed at promoting the use of non-polluting, electric vehicles such as the Reva from the Bangalore-based Reva Car Company and the Bijli from Scooters India.
In terms of impact, for Tata Engineering, the duty cuts will result in a further lowering of the price of all their four major products - - Indica, Sumo, Safari and the recently introduced C-segment car, Indigo. Importantly, the Indigo, which has already been priced competitively, could sport an even lower price tag, closer to the Rs 4-lakh mark, improving the prospects of the company weaning buyers away from top-end B-segment cars.
Similarly, Mahindra & Mahindra's new sports utility vehicle, the Scorpio, could get a leg up from this duty cut. The cut has also come even as the company is contemplating a stripped-down, lower-priced version of the vehicle.
For Maruti Udyog, the most significant impact of the excise rate cut will be on the Maruti 800, the company's bread and butter model. The reduction in price that the company is expected to announce could make the Maruti 800 one of the cheapest cars to own any where in the world. Importantly, the psychological Rs 2 lakh price barrier may again be breached in the reverse direction. This could lead to a renewal of buying interest for the car and of particular interest could be the entry-level M800, which the company is hoping to promote actively in the highly price sensitive rural areas.
By announcing a small hike in the prices of their vehicles in December 2002 and January this year, most automobile manufacturers have also ensured that a portion of the duty cuts announced in this Budget goes directly to their bottomline. Even if the price hikes were fully justified by an increase in input costs, the duty cut is a blessing for these companies.
If the new, additional one per cent duty announced on passenger cars and MUVs as the contribution towards the National Calamity Contingent Fund, is taken into account, the effective cut in prices would be about seven per cent.
However, this duty cut, the second in recent history, only brings back the issue of whether the cuts will eventually percolate to the car buyer in the long term. The previous eight per cent cut in excise rates on cars and MUVs was effectively nullified by progressive price hikes announced by the manufacturers. Will history repeat itself ?
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